Foreign capital flees, retail investors rush in—摩根大通详解韩国股市巨震背后的资金博弈

Original Author: Zhao Ying

Original Source: Wallstreetcn

The South Korean stock market is experiencing a rare structural divergence in capital flows: foreign investors are posting record net selling, while retail investors are absorbing the supply at a comparable scale. This tug-of-war, unfolding against a fundamentally positive backdrop driven by the AI wave, is collectively shaping the unique ecosystem of Asia's most volatile market.

According to a tracker, JPMorgan's latest South Korea equity strategy report, published on June 25, states that foreign investors have net outflowed approximately $95 billion from Korean stocks this year, which could easily break the record for annual foreign outflows from any single Asian market. Simultaneously, retail investors (including local ETF purchases) have accumulated a net buying volume of around $80 billion year-to-date, becoming the primary force supporting the market.

JPMorgan maintains a bullish stance on the Korean stock market, raising its KOSPI 12-month base/bullish/bearish scenario targets to 12,500/15,000/8,000 points respectively, and advises investors to add exposure during any pullbacks and maintain maximum risk exposure.

While the aforementioned capital flow pattern is unlikely to reverse in the short term, the fundamental upside driven by AI, the national wealth effect from corporate earnings growth, and the valuation recovery potential from corporate governance reforms still constitute the core bullish thesis for the Korean stock market. South Korea remains JPMorgan's most preferred market in Asia.

Forced Foreign Selling: Size Constraints Trigger Non-Discretionary Sell-Off

Foreign outflows from South Korea are characterized as "non-discretionary" rather than driven by active bearishness. The core reason is that the market capitalization of the two major memory chip giants, Samsung Electronics and SK Hynix, has expanded sharply, hitting the portfolio limits of long-only Emerging Market (EM) funds. This size constraint affects approximately 10% of foreign holdings in each of these two stocks, forcing fund managers to continuously reduce positions as share prices rise.

Data shows that over 90% of total foreign outflows this year come from these two memory stocks. This structural characteristic means that as long as memory stocks continue to outperform the regional benchmark, the benchmark constraints for EM funds will persist, and the pressure on foreign outflows will continue.

Notably, despite sustained net selling, the actual proportion of foreign holdings in Korean stocks has increased significantly compared to the beginning of the year — mainly because the price appreciation has far exceeded the scale of selling. Currently, the two major memory stocks together account for more than two-thirds of foreign holdings in South Korea. In contrast, global funds (non-EM specific) are significantly underweight Korea. In client surveys, many large real money accounts reported insufficient exposure to Korea, indicating a need to replenish holdings.

Leveraged ETF Expansion: Structural Increase in Volatility

The abnormal surge in Korean market volatility is closely linked to the explosive growth of domestic and foreign leveraged ETFs. The assets under management (AUM) of leveraged ETFs tracking Korean assets has grown to $50 billion, with most of the increase coming from the market's own appreciation.

These ETFs primarily achieve exposure through stock index futures, with some spot and options, leading to a sharp rise in open interest for single-stock futures. Simultaneously, the demand for "crash protection" from ETFs has also pushed up implied volatility — the ratio of VKOSPI to VIX is currently near 5x, compared to a historical norm of around 1x. The size of Gamma imbalances related to leveraged ETFs has now exceeded $1 billion, significantly amplifying market volatility in both directions.

Furthermore, the Korea Exchange and clearing house have raised capital requirements to cope with higher trading volumes, leading to increased funding costs for large-cap stocks, and some brokerages face difficulties managing concentrated exposures. Given the widespread adoption of these instruments both domestically and internationally, the scale of leveraged ETFs is unlikely to contract substantially in the short term, and high volatility will become a normal feature of the Korean market structure.

Retail Absorption: Room Remains, Leverage Risk Manageable

Against the backdrop of persistent foreign outflows and institutional investors (pensions) reducing positions on strength for rebalancing, retail investors have become the primary buyers in the Korean stock market. Data indicates that if NXT platform transactions and ETF purchases are included, retail net buying volume this year has amounted to approximately $80 billion.

There is still room for sustained retail buying for three reasons: First, although leverage levels in margin balances and options trading have increased, they remain low relative to overall market capitalization and client deposits. Second, Korean retail investors are just beginning to repatriate holdings of overseas stocks back to the domestic market, leaving significant room for further inflow. Third, with income growth and the ongoing stock wealth effect, residents' willingness to invest in stocks is likely to increase further, especially against a backdrop of restricted real estate investment.

However, retail investors' share of market turnover has moderated from its average of 65% over the past two months, while pension fund participation has increased slightly. Nevertheless, pensions remain net sellers overall to maintain target portfolio weights.

AI Narrative Disruptions: Cyclical Fluctuations Don't Alter Uptrend

The fundamentals of the Korean market are highly correlated with the AI cycle, which remains on a strong upward trajectory. Analysts maintain a constructive view of the memory cycle being "higher for longer" and believe that the earnings of Korean tech stocks have higher elasticity compared to their global counterparts.

Nevertheless, periodic disruptions to the AI narrative are inevitable. JPMorgan lists five factors that have recently caused market volatility: First, signs of optimization at the user level reducing token consumption, raising concerns about token pricing. Second, positive market reception for China's Zhipu AI's GLM 5.2, rekindling competition worries. Third, policy uncertainty arising from the latest export control measures. Fourth, sustained pressure from equity and bond supply. Fifth, the potential reopening of the Strait of Hormuz could alleviate pressure on related markets and sectors.

As long as the growth rate of hyperscaler cloud capital expenditure continues to outpace that of semiconductor equipment capital expenditure, the supply-demand imbalance will persist, thereby supporting the profit margins of memory chip manufacturers.

The AI-related benefits for Korean memory chip companies are now large enough to have a tangible impact at the macroeconomic level. Estimates suggest that direct taxes (including corporate income tax) paid to the government by the two major memory companies over the next three years could easily exceed $350 billion, with the figure being even larger if personal income tax on employee bonuses is included.

For context, South Korea's total foreign exchange reserves stand at approximately $427 billion, and its total government debt is around $1 trillion. This wealth effect will provide the South Korean government with ample resources for long-term physical and financial investment, social infrastructure development, and strategic planning for the AI era.